What is the role of legal systems in financial intermediation? Theory and evidence |
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Authors: | Laura Bottazzi Marco Da Rin Thomas Hellmann |
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Institution: | aBologna University and IGIER, Italy;bTilburg University, ECGI, and IGIER, The Netherlands;cUniversity of British Columbia, Canada |
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Abstract: | We develop a theory’ and empirical test of how the legal system affects the relationship between venture capitalists and entrepreneurs. The theory uses a double moral hazard framework to show how optimal contracts and investor actions depend on the quality of the legal system. The empirical evidence is based on a sample of European venture capital deals. The main results are that with better legal protection, investors give more non-contractible support and demand more downside protection. These predictions are supported by the empirical analysis. Using a new empirical approach of comparing two sets of fixed-effect regressions, we also find that the investor’s legal system is more important than that of the company in determining investor behavior. |
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